Block-pulse operational matrix method for solving fractional Black-Scholes equation

Abstract

Purpose

The purpose of this paper is to evaluate a European option using the fractional version of the Black-Scholes model.

Design/methodology/approach

In this paper, the authors employ the block-pulse operational matrix algorithm to approximate the solution of the fractional Black-Scholes equation with the initial condition for a European option pricing problem.

Findings

The fractional derivative will be described in the Caputo sense in this paper. The authors show the accuracy and computational efficiency of the proposed algorithm through some numerical examples.

Originality/value

This is the first paper that considers an alternative algorithm for pricing a European option using the fractional Black-Scholes model.

Citation

Mehrdoust, F., Refahi Sheikhani, A.H., Mashoof, M. and Hasanzadeh, S. (2017), "Block-pulse operational matrix method for solving fractional Black-Scholes equation", Journal of Economic Studies, Vol. 44 No. 3, pp. 489-502. https://doi.org/10.1108/JES-05-2016-0107